End Of The Year Tax Tips, Part 2

Last week we covered tax benefits to take advantage of before the end of the year. Go to artofthinkingsmart.com/go/tax for more tax information and to get the updated contribution limits for your retirement accounts for 2015.

* Understand the Home Office Deduction. If you use your home as your primary place of business, meet clients and customers in the normal course of business, or your office is a separate structure not attached to your home, you can use the new safe harbor deduction. It allows you to deduct up to $5 per square foot of home-office space up to $1,500. The amount of the deduction has been controversial, since there are home expenses such as rent, mortgage interest, taxes, utilities and depreciation. The IRS created the safe harbor deduction late last year so you wouldn’t have to reduce your normal itemized deduction for the home office.

* Adjust your withholding. Every paycheck, your employer withholds part of your paycheck to pay for taxes. You can adjust how much is taken out by changing the number of allowances you claim on your W4. If you think you will owe taxes this year, to avoid an underpayment penalty you can try to make up for the shortfall by increasing your withholding on your salary or bonuses.

On the flip side, if you have too much money withheld for taxes, you are giving the government an interest-free loan and getting a tax refund. There may be better ways to use that money. You can lower your withholding to increase your pay amount, invest the proceeds and earn interest on it.

You should regularly check your W4 withholding, especially for life changes such as getting another job, you’re unemployed for part of the year, your spouse gets a job or changes jobs, you get married or divorced or you have a baby (or another dependent).

* Take advantage of tax-loss harvesting. You can sell an investment like a stock or mutual fund that has declined in value and write off the loss from your taxable income. You then immediately can replace that investment with one that is highly correlated. It can’t be the same investment or something very similar and realize the losses unless you wait 30 days.

This is known as the “wash sale” rule. Studies have shown that by utilizing tax-harvesting on your investments every year, you can increase your after-tax returns by more than 1.29 percent. You can deduct up to $3,000 in losses annually and if you have more, you can carry it forward to future years. You can look for tax-loss harvesting opportunities when you are rebalancing your portfolio, getting two great benefits with one move.

However, you want to make sure this is right for you. If you believe you will be making more money in the future, it is better to take gains now instead of losses. Talk to a financial professional to make sure this is right for you and to avoid violating the wash sale rule. You can visit artofthinkingsmart.com/go/tax for more information on tax-loss harvesting.